The pair danced to Psy's chart-topping song and to her track Music in front of nearly 20,000 people at Tuesday's show at New York's Madison Square Garden.
The Queen of Pop said that she was a big fan of the rapper, who flew 'all the way from Frankfurt, Germany this morning', and that she loved his bright red suit.
She matched his ensemble with red knickers under her black outfit, that she flashed at the star.
Psy said that performing with Madonna was 'one of the most amazing experiences' of recent months.
Madonna also collected money for those affected by Superstorm Sandy, with fans throwing cash on stage when she sang Like A Virgin.
She said she had collected 3,000 dollars at Monday's show at the same venue.
From Press Association Via Yahoo! News